German Labor Surprise Sends Euro, Bund Yields High

How Did the Markets React? 

The labor market in Germany tightened more than expected in November, with the unemployment level plummeting 86,000 to a four year low of 10.2%. Employment figures have been improving steadily in Europe’s largest economy as businesses benefit from solid export demand from abroad, leading them to hire more workers in order to boost output. However, today’s report runs directly counter to dismal retail sales for Germany, which declined 0.2% in October and dropped a whopping 2.9% the month prior, indicating that consumers are still cautious to spend amidst rising interest rates by the ECB and the VAT hike for Germany in January 2007. Nevertheless, the ECB is still widely expected to hike rates 25 basis points in December to 3.50%. While bond, FX, and equitiy markets all responded in the “correct” fashion to the German release, whether the data was the legitimate impetus for the euro and Xetra DAX index is debatable.

Bonds - German 10-Year Bunds

German fixed income markets had already started the day on a downtrend, and the release of better-than-expected employment conditions left prices on 10-year bunds to spike down further to a low of 100.10, as a tighter labor market would underpin the ECB’s confidence in the economy to be able to withstand a December hike to 3.50%. However, bunds bounced later in the morning as there seemed to be too much underlying support at the session low. Price eventually settled to 100.28 during the European afternoon, with yields up 1 basis point to 3.715%.